The credit-card law President Obama signed last month, making it tougher to boost interest rates and fees, ends a period when the card business had a magic way with Washington.
From the deregulation of the late 1970s through the 2005 bankruptcy law that made it harder for card borrowers to walk away from out-of-control debts, the industry, with help from Republican leaders and loyal Democrats such as then-U.S. Sen. Joe Biden (D., Del.), derailed repeated efforts to curb card rates and fees.
This time? "I didn't hear from them," says U.S. Sen. Bob Casey (D., Pa.), who worked with Sen. Charles Grassley (R., Iowa) and others to put limits on card companies soliciting students in the bill.
Why were the banks quiet? Rep. Michael Castle (R., Del.), who had urged colleagues to slow down, told
me Federal Reserve chief Ben Bernanke had pushed for many of the reforms.
But Casey cited the banks' political incapacity, given their financial problems and government dependence: "They're in the midst of all that trouble," Casey put it.
Also, industry leader MBNA Corp., the Delaware lender that bankrolled politicians and led lobbying fights, is gone from the field. Bank of America Corp. bought it in 2006, and that bank has its own problems right now.
Indeed, the credit card business isn't what it used to be. Bank of America's card subsidiary told federal bank regulators it lost $1.5 billion in the first quarter, compared with an average $1 billion profit in the same quarter for each of the previous two years. The other big issuers, Citigroup, JPMorgan Chase & Co. and American Express Corp., also say card profits have turned to losses.
As bankers warned, card lenders are boosting card rates before the new restrictions take effect next winter. The Federal Reserve says the average credit card plan now charges 13.1 percent interest, up from 11.9 percent just a year ago. By contrast, home mortgage rates have dropped nearly 1 percentage point during the same period. Car loan rates are also down.
"The willingness and ability of cardholders to accept or withstand these increases is not limitless," warns Moody's analyst Will Black in a report to clients. Credit-card loan losses have reached a record 10 percent. Black expects they'll go up more.
"This is an about-face from 20-plus years of deregulation in the banking industry, which was also accompanied by steadily higher consumer-borrowing levels," bond analyst David Hendler of CreditSights Inc. wrote in a note to clients. "Although the administration has a rather paternalistic view of the American consumer's maturity level for handling debt, we have to admit that this viewpoint has largely proven [right] in the current crisis."
One section of the law requires colleges that sell their student and alumni mailing lists to credit card banks to make public their payment agreements, reveal how many sign up for cards, and report how much they make from alumni and student debt.
The alumni card business is dominated by Bank of America, MBNA's successor. Penn State had one of the earliest and biggest card programs. Despite the new law, Penn State still won't say what it gets out of the deal. "The legal counsel for our alumni association is reviewing the credit-card act," said spokesman Geoff Rushton.
The University of Delaware is more open. Fewer alumni have been using the cards lately, and proceeds have shrunk to $227,000 last year, from $280,000 in 2005, said Delaware vice president Monica Taylor. "It's a benefit we have for alumni," she said. "I won't say it's a big revenue generator. We are renegotiating with Bank of America."
Casey co-sponsored student-lending provisions in the bill, but he credits U.S. Rep. Patrick Murphy (D., Bucks), for pushing to expose the college deals.
"I used to be a professor at West Point. I saw what goes on with these credit companies. They are not transparent," said Murphy, who told me he used to have an alumni credit card.
"I canceled it after I knew better," Murphy said. "Now, I make my alumni donations directly to the school. They're tax-deductible."